UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to
Commission File Number: 0-10294
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California | 95-3276269 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2310 Cousteau Court Vista, California (Address of principal executive offices) | 92081-8346 (Zip Code) |
(760) 598-1655
(Registrant’s telephone number)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | Smaller reporting company | ý |
(Do not check if a smaller reporting company)
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at September 12, 2008 | |
Common Stock, no par value per share | 12,962,999 shares |
1
PART I | FINANCIAL INFORMATION | PAGE |
Item 1. | 3-11 | |
Item 2. | 12-15 | |
Item 4T. | 16 | |
PART II | OTHER INFORMATION | |
Item 6. | 17 | |
18 |
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32
PART I | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands)
July 31, 2008 | April 30, 2008 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,364 | $ | 5,049 | ||||
Short-term investments, available for sale | 379 | 569 | ||||||
Accounts receivable, net | 182 | 565 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 252 | 57 | ||||||
Inventories, net | 1,407 | 1,246 | ||||||
Other current assets | 237 | 262 | ||||||
Total current assets | 7,821 | 7,748 | ||||||
Equipment, furniture and fixtures, net | 399 | 324 | ||||||
Capitalized computer software development costs, net | 27 | 36 | ||||||
Intangible assets – patent, net | 22 | 23 | ||||||
Other noncurrent assets | 49 | 49 | ||||||
Total assets | $ | 8,318 | $ | 8,180 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 472 | $ | 285 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 433 | 40 | ||||||
Accrued payroll and related taxes | 334 | 377 | ||||||
Warranty reserves | 397 | 425 | ||||||
Payable to Parent | 249 | 249 | ||||||
Other current liabilities | 77 | 69 | ||||||
Deferred revenues | 221 | 218 | ||||||
Total current liabilities | 2,183 | 1,663 | ||||||
Long-term liabilities | 11 | 20 | ||||||
Total liabilities | 2,194 | 1,683 | ||||||
Commitments | ||||||||
Shareholders’ equity: | ||||||||
Preferred shares, no par value; 20,000 shares authorized; no shares issued or outstanding | - | - | ||||||
Common shares, no par value; 50,000 shares authorized; 12,963 shares issued and outstanding | 56,370 | 56,370 | ||||||
Accumulated deficit | (50,246 | ) | (49,873 | ) | ||||
Total shareholders' equity | 6,124 | 6,497 | ||||||
Total liabilities and shareholders' equity | $ | 8,318 | $ | 8,180 |
See notes to condensed consolidated financial statements
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended | ||||||||
July 31, | ||||||||
2008 | 2007 | |||||||
Revenues: | ||||||||
Sales of products | $ | 1,386 | $ | 1,385 | ||||
Services | 101 | 45 | ||||||
1,487 | 1,430 | |||||||
Cost of sales: | ||||||||
Cost of product sales | 854 | 957 | ||||||
Cost of services | 28 | 21 | ||||||
882 | 978 | |||||||
Gross profit | 605 | 452 | ||||||
Research and development expenses | 559 | 92 | ||||||
Selling, general and administrative expenses | 449 | 488 | ||||||
Loss from operations | (403) | (128) | ||||||
Other income: | ||||||||
Interest and dividend income | 30 | 68 | ||||||
Net loss | $ | (373) | $ | (60) | ||||
Net loss per share: | ||||||||
Basic and diluted | $ | (0.03) | $ | (0.00) | ||||
Weighted average shares used in computation of net loss per share: | ||||||||
Basic and diluted | 12,963 | 12,963 |
See notes to condensed consolidated financial statements
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
Three Months Ended July 31, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (373) | $ | (60) | ||||
Adjustments to reconcile net loss to net cash provided by (used in) | ||||||||
operating activities: | ||||||||
Depreciation and amortization | 56 | 83 | ||||||
Warranty reserve expense (adjustments) | (22) | 17 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 383 | (495) | ||||||
Costs and estimated earnings in excess of billings on | ||||||||
uncompleted contracts | (195) | 74 | ||||||
Inventories | (161) | (107) | ||||||
Other current assets | 25 | (43) | ||||||
Accounts payable | 187 | 347 | ||||||
Income taxes payable | - | (89) | ||||||
Billings in excess of costs and estimated earnings on uncompleted | ||||||||
contracts | 393 | (3) | ||||||
Accrued payroll and related taxes | (43) | (31) | ||||||
Warranty reserves | (6) | (84) | ||||||
Payable to Parent | - | 1 | ||||||
Other liabilities | (1) | (10) | ||||||
Deferred revenues | 3 | (68) | ||||||
Net cash provided by (used in) operating activities | 246 | (468) | ||||||
Cash flows from investing activities: | ||||||||
Purchases of short-term investments | - | (2,538) | ||||||
Sales of short-term investments | 190 | 5,347 | ||||||
Additions to equipment, furniture and fixtures | (121) | (10) | ||||||
Net cash provided by investing activities | 69 | 2,799 | ||||||
Net increase in cash and cash equivalents | 315 | 2,331 | ||||||
Cash and cash equivalents at beginning of period | 5,049 | 215 | ||||||
Cash and cash equivalents at end of period | $ | 5,364 | $ | 2,546 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for income taxes | $ | - | $ | 101 |
See notes to condensed consolidated financial statements
5
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Description of the Business
International Lottery & Totalizator Systems, Inc. (“ILTS” or, together with its subsidiaries, the “Company”) designs, manufactures, sells, manages, supports and services computerized wagering systems and terminals for the global online lottery and pari-mutuel racing industries. The wagering system features include real-time, secure processing of data received from multiple locations, hardware redundancy and complete communications redundancy in order to provide the highest level of fault tolerant operation. In addition, although the Company is not presently doing so, ILTS has demonstrated capability to provide full facilities management services to customer organizations authorized to conduct online lotteries. The Company is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to six months lead time before delivery of hardware begins.
In recent years, the Company has devoted significant resources to developing a certified end-to-end optical scan voting system consisting of the Inkavote Plus Precinct Ballot Counter (“PBC”) and full-featured Election Management Software that provides precinct tabulation, ballot review and audio voting capability in a single compact unit. These efforts leverage the Company’s extensive experience to develop highly secure, mission-critical solutions that meet all of the Help America Vote Act of 2002 (“HAVA”) and Americans with Disabilities Act (“ADA”) requirements at a much lower cost than direct-recording electronic or touch screen systems. In addition, the Company’s voting system offers the following features:
· | High level of security and vote encryption ensure integrity and voter privacy; |
· | Electronic and paper audit trails that offer added security and redundancy for recounts; |
· | Minimal training for poll workers to set-up and operate; |
· | Minimal voter re-education; and |
· | Capability to tally results in real time. |
In consideration of net revenue, as defined, ILTS, in accordance with the terms of a strategic arrangement, granted Election Systems & Software, Inc. (“ES&S”) an exclusive worldwide license to manufacture, sell and sublicense ILTS’s intellectual property relating to the PBC and PBC software to ES&S’s end customers. ES&S has agreed to act as ILTS’s exclusive distributor, reseller, on-going service provider and manufacturer of the PBC and PBC software. The Company has recognized licensing revenue, manufacturing and product servicing and support revenues totaling approximately $5.3 million through July 31, 2008, of which approximately $20,000 was recognized during the first quarter of fiscal 2009, and approximately $5.3 million was recognized in prior fiscal years.
Berjaya Lottery Management (H.K.) Ltd. (“BLM” or the “Parent”) owns 71.3% of the outstanding voting stock of ILTS.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of ILTS and its wholly-owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows have been included.
The results of operations for the interim periods shown in this report are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended April 30, 2008 filed with the SEC on July 14, 2008.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Actual results could differ from those estimates. Estimates may affect the reported amounts of assets and liabilities and revenues and expenses, and the disclosure of contingent assets and liabilities.
Deferred Revenues
Deferred revenues of approximately $221,000 as of July 31, 2008 represent prepayments for software products which were related to the use of the PBC voting system and prepaid software support services. The Company will recognize the revenues upon its fulfillment of the prescribed criteria for revenue recognition.
Warranty Reserves
Estimated warranty costs are accrued as revenues are recognized. Included in the warranty cost accruals are costs for basic warranties on products sold. A summary of product warranty reserve activity for the three months ended July 31, 2008 is as follows:
(Amounts in thousands) | ||||
Balance at May 1, 2008 | $ | 425 | ||
Warranty reserve expense adjustments | (22) | |||
Charges incurred | (6) | |||
Balance at July 31, 2008 | $ | 397 |
Income Tax Uncertainties
In July 2006, the Financial Accounting Standard Board (“FASB”) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions by prescribing a minimum probability threshold a tax position must meet to be recognized in the financial statements. FIN 48 requires that the Company recognize in its financial statements the impact of a tax position if it is more likely than not that the position will be sustained upon examination.
The Company became subject to the provisions of FIN 48 as of May 1, 2007. The adoption of FIN 48 had no material effect on the Company’s condensed consolidated financial statements.
Segment Information
Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) requires companies to report certain information about operating segments in their condensed consolidated financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.
The Company divides its operations into two operating segments: the gaming business and the voting business. The gaming segment designs, manufactures and manages computerized wagering systems and terminals for the online lottery and pari-mutuel racing industries worldwide. The voting segment, in consideration of net revenue, as defined, and in accordance with the terms of the strategic arrangement, granted ES&S an exclusive worldwide license to manufacture, sell and sublicense to ES&S’s end customers ILTS’s intellectual property relating to the PBC and PBC software it designed. The voting system business generated licensing revenue, manufacturing and product servicing and support revenue.
The Company’s segment information is presented below:
As of and for the Three Months Ended | ||||||||||||
July 31, 2008 | ||||||||||||
Gaming Business | Voting Business | Totals | ||||||||||
Total revenues | $ | 1,467 | $ | 20 | $ | 1,487 | ||||||
Income (loss) from operations | 221 | (624) | (403) | |||||||||
Depreciation and amortization | 33 | 23 | 56 | |||||||||
Cost and estimated earnings in excess of billings on uncompleted contracts | 194 | 58 | 252 | |||||||||
Equipment, furniture and fixtures, net | 343 | 56 | 399 | |||||||||
Capitalized computer software development costs, net | - | 27 | 27 | |||||||||
Intangible assets – patent, net | - | 22 | 22 | |||||||||
Warranty reserves | 42 | 355 | 397 | |||||||||
Deferred revenues | 9 | 212 | 221 | |||||||||
As of and for the Three Months Ended | ||||||||||||
July 31, 2007 | ||||||||||||
Gaming Business | Voting Business | Totals | ||||||||||
Total revenues | $ | 1,300 | $ | 130 | $ | 1,430 | ||||||
Income (loss) from operations | 183 | (311) | (128) | |||||||||
Depreciation and amortization | 36 | 47 | 83 | |||||||||
Equipment, furniture and fixtures, net | 325 | 71 | 396 | |||||||||
Capitalized computer software development costs, net | - | 265 | 265 | |||||||||
Intangible assets – patent, net | - | 25 | 25 | |||||||||
Deferred revenues | 218 | 3,781 | 3,999 |
Inventories
Inventories are stated at the lower of cost or the current estimated market values. Cost is determined using the first-in, first-out method. The Company periodically reviews inventory quantities on hand and records a provision for excess and obsolete inventories based on the following factors:
· | Terminal models still currently in the field; |
· | The average life of the models; and |
· | The requirement for replacement parts on older models. |
Inventories consisted of the following:
July 31, | April 30, | |||||||
(Amounts in thousands) | 2008 | 2008 | ||||||
Raw materials and subassemblies | $ | 1,358 | $ | 1,042 | ||||
Work-in-process | 46 | 14 | ||||||
Finished goods | 3 | 190 | ||||||
$ | 1,407 | $ | 1,246 |
Net Loss Per Share
Basic net loss per share is based on the weighted average number of shares outstanding during the period.
At July 31, 2008 and 2007, the effects of the assumed exercise of options to purchase 86,000 and 87,000 shares of the Company’s common stock, respectively, at the price of $1.00, were not included in the computation of diluted net loss per share amounts because they were anti-dilutive for that purpose because of the reported net loss.
Stock Options
Descriptions of the stock option plans are included in Note 9 of the Company’s Annual Report on Form 10-KSB for the year ended April 30, 2008. A summary of the status of the Company’s vested stock options including changes related to options that were granted outside the 2000 Plan and related information for the three months ended July 31, 2008 are presented below:
(shares in thousands)
Stock Options | Shares | Weighted-Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||
Options outstanding at May 1, 2008 | 86 | $ | 1.00 | 1.48 years | - | ||||||||
Granted | - | - | - | ||||||||||
Exercised | - | - | - | ||||||||||
Forfeited/expired | - | - | |||||||||||
Options outstanding and exercisable at July 31, 2008 | 86 | $ | 1.00 | 1.23 years | - |
All stock options previously granted to employees were fully vested as of July 31, 2008. In addition, the Company did not grant any stock options or warrants to employees in the year ended April 30, 2008 and the three months ended July 31, 2008. Therefore, there was no share-based compensation expense related to employee stock options recognized during the three months ended July 31, 2008.
MAJOR CUSTOMERS
Three Months Ended July 31, | ||||
2008 | 2007 | |||
Revenue: | ||||
From unrelated customers | Two customers accounted for 77% of total revenue | Two customers accounted for 40% of total revenue | ||
From related customers | One customer accounted for 15% of total revenue | Two customers accounted for 47% of total revenue |
Related Party Transactions
During the three months ended July 31, 2008 and 2007, revenues from all related party agreements for sales of products and services totaled approximately $305,000 (21% of total revenue) and $687,000 (48% of total revenue), respectively. Included in accounts receivable at July 31, 2008 was $83,000 from these customers. Descriptions of the transactions with the Company’s related parties in the three months ended July 31, 2008 are presented below.
Berjaya Lottery Management (H.K.) Ltd.
In 1996, the Company entered into an agreement to purchase specific inventory on behalf of BLM, the owner of 71.3% of ILTS’s outstanding voting stock as of July 31, 2008. Title to the inventory resides with BLM and is on consignment; therefore, no amounts are reflected in the Company’s condensed consolidated balance sheets for inventory purchased on BLM’s behalf.
Over time, the Company has sold or used portions of the BLM inventory in unrelated third party transactions. The sale or use of the inventory results in a liability to BLM for the cost of the items utilized.
The financial activities and balances related to BLM were as follows:
· | There were no related party sales to BLM in the three months ended July 31, 2008 and 2007; |
· | There were no accounts receivable balances from BLM at July 31, 2008; and |
· | Liabilities to BLM arising from the sale or use of the BLM inventory, recorded as “Payable to Parent,” were $249,000 as of July 31, 2008. |
Philippine Gaming Management Corporation
On September 18, 2007, the Company received an order from Philippine Gaming Management Corporation (“PGMC”), a related party, valued at approximately $2.1 million for lottery terminals. The first two shipments of terminals were completed in the fourth quarter of fiscal 2008, and the remaining terminal shipments will be completed in the second quarter of fiscal 2009.
In addition, the Company provides terminal spare parts to PGMC on an ongoing basis.
The financial activities and balances related to transactions with PGMC were as follows:
· | Revenue recognized on the sale of spare parts during the three months ended July 31, 2008 totaled approximately $220,000. Revenue recognized on the performance of lottery system software development and sale of spare parts during the three months ended July 31, 2007 totaled approximately $429,000; |
· | Net billings in excess of costs and estimated earnings relating to the abovementioned terminal order totaled $305,000 at July 31, 2008; and |
· | Accounts receivable from spare part orders totaled $70,000 at July 31, 2008. |
Sports Toto Malaysia
On December 11, 2007, the Company received an order valued at $347,000 for software development and services from Sports Toto Malaysia (“STM”), a related party. The project is scheduled for completion in the third quarter of fiscal 2009.
In addition to supplying terminals and software products to STM, the Company provides terminal spare parts and software support services to STM.
The financial activities and balances related to transactions with STM were as follows:
· | Revenues of $71,000 and $239,000 were recognized on the sale of spare parts and software support services during the three months ended July 31, 2008 and 2007, respectively; |
· | There was deferred revenue of $9,000 on software support services at July 31, 2008; |
· | Net costs and estimated earnings in excess of billings on uncompleted contract with respect to the software development and services order totaled $128,000; and |
· | Accounts receivable from software development order totaled $8,000 at July 31, 2008. |
Natural Avenue
The Company provides Natural Avenue, a related party, with lottery terminals, software products and support services as well as spare parts. The financial activities and balances related to transactions with Natural Avenue were as follows:
· | Revenues of $14,000 and $18,000 were recognized on the sale of support services and spare parts during the three months ended July 31, 2008 and 2007, respectively; |
· | There were no billings in excess of costs and estimated earnings at July 31, 2008; and |
· | Accounts receivable totaled $5,000 at July 31, 2008. |
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for using fair value to value financial assets and liabilities under accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has adopted the provisions of SFAS 157 as of May 1, 2008. We assessed the potential impact the adoption of SFAS 157, as it relates to financial assets and liabilities, would have on our condensed consolidated financial statements and concluded that there were no material effects on our consolidated financial position, results of operations and cash flows.
Litigation
The Company was not a party to any litigation proceedings as of September 12, 2008.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD LOOKING STATEMENTS
SAFE HARBOR STATEMENT PURSUANT TO SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “future,” “intend” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations, plans or projections and are inherently uncertain. Our actual results may differ significantly from management's expectations, plans or projections. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission.
The forward-looking statements contained in this filing are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by forward-looking statements. These risks and uncertainties include dependence on business from foreign customers sometimes in politically unstable regions, political and governmental decisions as to the establishment of lotteries and other wagering industries in which our products are marketed, fluctuations in quarter-by-quarter operating results and other risk factors described in our Annual Report on Form 10-KSB for the year ended April 30, 2008.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
Our condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable. We base our estimates on historical experience, contract terms, observance of known trends in our Company and the industry as a whole, and information available from other outside sources. Estimates affect the reported amounts and related disclosures. Actual results may differ from initial estimates. The areas most sensitive to estimation are revenue recognition, warranty reserves, the allowance for doubtful accounts, the amortization period for capitalized software development costs and the deferred tax valuation allowance.
RESULTS OF OPERATIONS
Revenue Analysis
Three Months Ended | ||||||||||||
(Amounts in thousands) | July 31, | |||||||||||
Revenues | 2008 | 2007 | Change | |||||||||
Products: | ||||||||||||
Contracts | $ | 941 | $ | 563 | $ | 378 | ||||||
Spares | 445 | 822 | (377) | |||||||||
Total Products | 1,386 | 1,385 | 1 | |||||||||
Services: | ||||||||||||
Software Support | 81 | 45 | 36 | |||||||||
Product Servicing and Support | 20 | - | 20 | |||||||||
Total Services | 101 | 45 | 56 | |||||||||
$ | 1,487 | $ | 1,430 | $ | 57 |
Significant fluctuations in period-to-period contract revenue are expected in the gaming industry since individual contracts are generally considerable in value, and the timing of contracts does not occur in a predictable trend. Contracts from the same customer generally do not recur in the short-term. Accordingly, comparative results between quarters are not indicative of trends in contract revenue.
Contract revenue for the three months ended July 31, 2008 was $941,000, compared to $563,000 in the same period in 2007. We attribute the increase in 2008 to a lottery system contract from an unrelated customer.
Spares revenue for the three months ended July 31, 2008 was $445,000, compared to $822,000 for the corresponding period in 2007. The increased spares revenue in 2007 was due to a significant spare part order from an unrelated party. We derived spares revenue from various customers on the shipment of spares orders. Customer demand for spare parts fluctuates from period to period.
Software support revenues totaled $81,000 and $45,000 for the three months ended July 31, 2008 and 2007, respectively. The increase in 2008 is due to one additional software support order from a related customer.
Product servicing and support revenue of $20,000 in the period ended July 31, 2008 is related to the servicing of the PBCs voting units for ES&S in a one-time arrangement.
Related party revenue of approximately $305,000 accounted for 21% of total revenue in the three months ended July 31, 2008, compared to $687,000 or 48% of total revenue in the corresponding period in 2007.
Cost of Sales and Gross Profit Analysis
Three Months Ended | ||||||||||||||||
July 31, | July 31, | |||||||||||||||
(Amounts in thousands) | 2008 | 2007 | ||||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 1,386 | 93 | % | $ | 1,385 | 97 | % | ||||||||
Services | 101 | 7 | % | 45 | 3 | % | ||||||||||
Total revenues | $ | 1,487 | 100 | % | $ | 1,430 | 100 | % | ||||||||
Cost of sales: | ||||||||||||||||
Products | $ | 854 | 57 | % | $ | 957 | 67 | % | ||||||||
Services | 28 | 2 | % | 21 | 1 | % | ||||||||||
Total costs of sales | $ | 882 | 59 | % | $ | 978 | 68 | % | ||||||||
Gross profit: | ||||||||||||||||
Products | $ | 532 | 36 | % | $ | 428 | 30 | % | ||||||||
Services | 73 | 5 | % | 24 | 2 | % | ||||||||||
Total gross profit | $ | 605 | 41 | % | $ | 452 | 32 | % |
Individual contracts are generally significant in value and are awarded in a highly competitive bidding process. The gross profit or loss margin varies from one contract to another, depending on the size of the contract and the competitive market conditions. Accordingly, comparative results between quarters are not indicative of trends in gross profit or loss margin.
Overall gross profit margins were at 41% for the three months ended July 31, 2008, compared to 32% for the corresponding period in 2007. The improvement in gross profit margins for 2008 is principally due to decreased production overhead costs resulting from higher utilization of production labor resources in research and development activities relating to the voting business.
Research and Development Expenses (“R&D”)
For the three months ended July 31, 2008, R&D expenses were $559,000, compared to $92,000 in the same period in 2007. We attribute the significant increases to the development of new technology relating to voting. We anticipate that R&D expenses will continue to increase in coming quarters as we focus on the development of new voting system products and enhancement of existing lottery technologies.
Selling, General and Administrative (“SG&A”)
SG&A expenses for the three months ended July 31, 2008 were $449,000, compared to $488,000 in the same period in 2007. The decrease of $39,000 in SG&A expenses is primarily related to certain personnel costs being absorbed by increased research and development activities, decreased sales and marketing related expenses, partially offset by increases in professional accounting and legal fees. We anticipate that SG&A expense will remain relatively constant for the remaining quarters of the fiscal 2009.
Other Income (Expense)
Other income and expense in the three months ended July 31, 2008 and 2007 consisted of interest and dividend income. We derived interest and dividend income from short-term investments and cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our net working capital at July 31, 2008 was $5.6 million.
Contract backlog at July 31, 2008 was approximately $3.2 million. Of this amount, approximately $2.6 million will be derived from remaining shipments relating to a lottery terminal order, lottery system contract and software development project. The remaining contract backlog amount of approximately $600,000 relates to executed voting contracts.
Additional sources of cash through July 31, 2009 are expected to be derived from spares and software support revenues. Uses of cash are expected to be for normal operating expenses and costs associated with contract execution.
While we anticipate that we will be successful in obtaining additional product or service contracts to enable us to continue normal operations through July 31, 2009, there can be no assurance that we will be able to acquire new contracts.
In the highly competitive industry in which we operate, operating results may fluctuate significantly from period to period. We anticipate that our cash flows from operations, expected contract payments and available cash will be sufficient to enable us to meet our liquidity needs through at least July 31, 2009. Although we are not aware of any particular trends, in the event that we are unable to secure new business, we may experience reduced liquidity or insufficient cash flows.
The following table summarizes our cash flow activities:
Three Months Ended | ||||||||||||
July 31, | July 31, | Increase | ||||||||||
2008 | 2007 | (Decrease) | ||||||||||
(Amounts in thousands) | ||||||||||||
Condensed cash flow comparative: | ||||||||||||
Operating activities | $ | 246 | $ | (468) | $ | 714 | ||||||
Investing activities | 69 | 2,799 | (2,730) | |||||||||
Net increase (decrease) in cash and cash equivalents | $ | 315 | $ | 2,331 | $ | (2,016) |
Cash Flow Analysis
Net cash provided by operating activities was $246,000 for the three months ended July 31, 2008, compared to net cash used in operating activities of $468,000 for the same period in 2007. The following factors contribute significantly to the period-to-period change in operating cash flow:
· | Net loss for the three months ended July 31, 2008 was $373,000, compared to $60,000 in 2007; |
· | Increase of $187,000 in accounts payable in the three months ended July 31, 2008, compared to $347,000 in 2007; |
· | Increase of $195,000 in costs and estimated earnings in excess of billings on uncompleted contracts in the three months ended July 31, 2008, compared to a decrease of $74,000 in 2007; |
· | Decrease of $383,000 in accounts receivable in the three months ended July 31, 2008; compared to an increase of $495,000 in 2007; |
· | Increase of $393,000 in billings in excess of costs and estimated earnings on uncompleted contracts in the three months ended July 31, 2008, compared to a decrease of $3,000 in 2007; and |
· | There were no changes in income tax payable in the three months ended July 31, 2008; compared to a decrease of $89,000 in 2007. |
Net cash provided by investing activities was $69,000 for the three months ended July 31, 2008, compared to $2.8 million in 2007. Net cash provided by investing activities in the three months ended July 31, 2007 resulted from the sale of short-term investments in auction rate securities and redemption of matured certificates of deposits. Capital expenditures amounted to $121,000 in the three months ended July 31, 2008, compared to $10,000 in 2007. The significant increase is related to the purchase of lottery test equipment and tooling equipment.
There were no financing activities for the three months ended in July 31, 2008 or 2007.
Capital Resources
As of July 31, 2008, there were no unused credit facilities.
ITEM 4T. | CONTROLS AND PROCEDURES |
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in SEC Rule 13a-15(e)) as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have not been any changes in the Company’s internal control over financial reporting during the quarter ended July 31, 2008 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 6. | EXHIBITS |
A. Exhibits
Exhibit Number | Document Description | |
31.1 | Certification of the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer of the Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: September 12, 2008 | INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. | |
/s/ | Jeffrey M. Johnson Jeffrey M. Johnson | |
President and Chief Executive Officer | ||
/s/ | T. Linh Nguyen | |
T. Linh Nguyen | ||
Chief Financial Officer and Corporate Secretary | ||
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